## Facts

- Electronic Data Systems Corporation (EDS) acquired FACS Incorporated (FCI) under a stock purchase agreement that included an initial payment to FCI stockholders and an escrow arrangement tied to post-closing performance and collections.
- After the acquisition, FCI’s business operated as an EDS division, and Michael T. Reddy (a former FCI leader and stockholder) became an EDS executive employee in that division.
- EDS also entered an incentive-compensation agreement under which former FCI stockholders, including Reddy, could earn additional compensation based on the division’s earnings.
- Years later, federal prosecutors indicted Reddy for conspiracy, mail fraud, and wire fraud, alleging manipulation of EDS financial records to increase escrow distributions and incentive-compensation payments.
- EDS filed a separate federal civil action against Reddy seeking to recover alleged overpayments connected to the acquisition-related arrangements.
- EDS’s bylaws promised indemnification and advancement to directors, officers, employees, and agents to the fullest extent permitted by DGCL § 145.
- Reddy demanded advancement of attorneys’ fees and related defense costs in both the federal criminal case and EDS’s civil action; EDS refused.
- Reddy filed a summary proceeding in the Delaware Court of Chancery under DGCL § 145(k) to enforce advancement rights under the bylaws.

## Issues

1. Whether EDS’s bylaw commitment to advance expenses to the fullest extent permitted by DGCL § 145 required advancement for Reddy’s defense of a federal criminal prosecution and an EDS-initiated civil action.
2. Whether the criminal and civil proceedings were brought “by reason of” Reddy’s service as an EDS employee, as required for coverage under DGCL § 145 and the bylaws.
3. Whether the advancement question could be resolved on summary judgment without addressing the merits of the underlying fraud allegations.

## Decision

- The court denied EDS’s motion to dismiss.
- The court granted Reddy’s motion for summary judgment.
- The court held that Reddy was entitled to advancement of reasonable defense expenses for both the criminal prosecution and the civil action because the proceedings alleged misconduct connected to his work as an EDS executive employee.
- Advancement was subject to the statutory undertaking to repay amounts advanced if indemnification is ultimately unavailable.

## Legal Principles

- Advancement is distinct from indemnification: it is an interim payment (a credit extension) to fund a defense while the underlying matter proceeds, conditioned on an undertaking to repay if required.
- A corporation that adopts bylaws providing advancement “to the fullest extent permitted” by DGCL § 145 creates an enforceable contractual right to advancement within the statute’s limits.
- The “by reason of” requirement is satisfied when claims are sufficiently connected to the individual’s corporate role; allegations of on-the-job misconduct in performing corporate responsibilities can meet this nexus.
- Advancement proceedings under DGCL § 145(k) are summary in nature and do not adjudicate the truth of the underlying allegations; they focus on the covered status and the causal link between the claims and corporate service.

## Conclusion

The Court of Chancery enforced EDS’s bylaw promise to provide advancement, requiring EDS to fund Reddy’s reasonable defense costs in related criminal and civil proceedings because the allegations targeted conduct undertaken in his capacity as an EDS executive employee, with ultimate entitlement to indemnification left for later determination.


Reddy v. Elec. Data Sys. Corp., No. 19467, 2002 WL 1358761 (Del. Ch. June 18, 2002)